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Firms Keep Innovation Alive
Despite Economic Downturn

By

Carol Hymowitz Staff Reporter of The Wall Street Journal

Updated May 22, 2001 12:01 a.m. ET

Soon after Jeff Cohen joined
Whirlpool Corp.
last year as vice president of the company's brand, orders for refrigerators, washers and other appliances started shrinking dramatically. Hurt by the economic slowdown, Whirlpool in December announced plans to cut 6,000 jobs, or 10% of its work force, and close a number of operations.

But instead of ordering his employees to hunker down, Mr. Cohen is challenging them to be creative. Those who suggest new ideas are rewarded with coupons that can be redeemed for gifts from a company catalog. Engineers and designers are currently pushing to create a new generation of appliances, such as in-home air purifiers and a "z Box," which can hold packages and lock, enabling people who aren't home during the day to receive packages. "We're grinding through the day-to-day uncertainty of this downturn, but we're also trying to create a future generation of products that will lead us out of it," says Mr. Cohen.

Innovation may seem a far-fetched goal for companies that are slashing operating costs and jobs these days. Creative ideas, after all, usually spring from people who feel confident enough to think originally and to risk exploring something that may flop. That mix of playfulness, passion and sheer perseverance may be difficult to muster in employees who are worried about job security, or who are being told to make do with fewer resources.

Under pressure from investors to keep their companies' stock prices high, chief executives typically react to economic slumps by strategizing how much and how quickly they can cut costs. Many expenses -- for equipment, office and factory space and employee compensation, for example -- can't be easily eliminated, so executives instead slash budgets for variables such as research, product development, new technology and advertising.

Yet savvy executives believe they can't afford not to continue innovating through a slowdown. They figure if they cut spending for research, for example, they will crimp their companies' long-term growth. They realize that slowdowns provide unique opportunities to beat out rivals. "It's very hard to gain market position in a boom because everybody is adding capacity and spending, but in a downturn, companies have more chance to distinguish themselves," says Adrian Slywotzky, a vice president at Mercer Management Consulting. Businesses that solve a problem, or create products and services to fill needs people didn't have before, gain an enormous edge over rivals.

That's a recipe
Intel Corp.
, the Santa Clara, Calif. chip maker, is following. Demand for Intel products, from processors to flash memory chips and networking chips, has been weak in recent months, resulting in sharply lower profits. Steep competition and a slump in spending for information technology is forcing Intel to lower prices. Meanwhile, its stock price has dropped substantially during the last year, closing at $29.90 Monday in 4 p.m. trading on the Nasdaq Stock Exchange, down from $59.1875 a year-earlier, after adjusting for a stock split.

Yet Intel is biting the bullet and boosting spending for research and development to $4.2 billion this year from $3.8 billion in 2000, while also spending $7.5 billion to build manufacturing plants, up from $6.8 billion last year. Intel's cash reserves of nearly $11 billion are "making it easier for us to stay this course," says Chief Financial Officer Andy Bryant. But the chip maker also is sticking to a tradition: It has increased its R&D budget every year since it was founded, through bad times as well as good.

"Just because the economy slows doesn't mean the pace of technology slows -- and it is new products that lead you out of a downturn," Mr. Bryant says. New chip-making processes currently being developed by Intel's R&D teams, he adds, will help cut costs and make Intel more competitive when demand bounces back.

Meanwhile, Intel is selectively paring other costs. It plans to cut about 5,000 jobs through attrition from its roster of 90,000 workers over the next nine months, and has put on hold its policy of giving every employee a home computer. But while the company considered some "forced time off" for employees, it rejected the idea "because we want people here, working on new ideas," Mr. Bryant says.

Executives elsewhere are not only spending money on new ideas but trying to create workplace environments that encourage creative thinking.

At Voyant Technologies Inc., which provides conferencing capabilities and other services to telecommunications companies, Chief Executive Bill Ernstrom wants his 200 employees not to become so worried about the slowdown that they stop thinking out of the box. Although his Westminster, Colo.-based company is profitable, with revenue growing at about 50% so far this year, "instinctively you want to pull yourself in and be cautious in this kind of business environment," he says. "I can feel the change from 18 months ago in my own psyche and in my employees."

To counter anxieties, he holds "open-book financial meetings every quarter to show employees we have enough in the bank, and they don't have to worry," he says. In February, Voyant Technologies also launched a "bright ideas" program. Employees are encouraged to submit ideas for new products or marketing tactics on the company's Web site, which other employees can then discuss and embellish. Every quarter, Mr. Ernstrom identifies the employee whose idea has generated the most discussion. He also presents the Elisha Gray award, or the "best almost" idea, to another employee. (Elisha Gray applied for a patent for the telephone a few hours after Alexander Graham Bell, Mr. Ernstrom notes.)

Ideas that are approved by top management are assigned to a team, which then oversees everything from design to product launch. "We want everyone to act like an owner and entrepreneur," says Mr. Ernstrom. "And we are encouraging the mind-set that the status quo isn't good enough," he adds.

Tom Kelley, general manager of IDEO, the Palo Alto, Calif.-based company which designed the original Apple mouse, the Palm V and other novel products, agrees that companies that foster innovation during slowdowns gain more than just an edge against competitors -- they inspire loyalty from talented employees.

For instance, employees at IDEO select the projects they want to work on and participate in intense brainstorming sessions where they pool as many ideas about a particular problem as they can think up in an hour. No one takes notes or chairs the meeting.

IDEO also tries to overcome "them vs. us" or boss vs. employee conflicts, which often quash creativity and can be especially divisive during slowdowns when tough decisions about spending must be made. After one of the company's teams recently hired two employees, they realized they didn't have enough office space in their area for the new hires. They debated what to do and finally agreed to each give up one foot of their own workspaces, so the new hires wouldn't have to sit far from them in an isolated spot. "Imagine the anger and grumbling that would have occurred if they had been told to do that," says Mr. Kelley. "But there's no grumbling since they decided themselves."